The Russian government is currently considering a ban on pre-selling apartments and forcing companies to complete construction before they put the properties on the market. President Vladimir Putin has already discussed the issue, but another recent scandal where pensioners videoed themselves on their knees asking for the government help after being ripped off has brought the issue back into the public eye.

Previously the idea of banning share agreements, where customers pay for their apartments before construction is complete, was already seen as a risk for the real estate market. Additional downside risks emerging from government discussions include the introduction of the new restrictions as soon as this year, whereas the original legislation called for its introduction in 2019 and full implementation by after 2020, VTB Capital commented on June 1. Pre-selling apartments is a wide spread industry practise and considerably eases the financing needs for construction.

The Kremlin brought the issue up in the pre-election period and the legislation was originally aimed at protecting a buyer from the situation in which they have paid for an apartment during the construction stage, but where the developer later went bankrupt.

"Depending on how they are defined, there could be over 100,000 such clients whose share participation agreements have not been honoured and the recent issue with Moscow Region-based Urban Group only worsened the situation," VTB Capital reminds.

On one hand the drive to make the housing market safer for the buyers is in line with the populist economic platform, which Putin presented upon his re-election. 

On the other, the impact on the market could render the ambitious housing expansion promise made by the president vulnerable to market and country risk through greater reliance on external financing.

"If the decision is approved, it would dramatically change the sector's landscape, and in particular, increase real estate pricing because developers would need to obtain funding from banks and investors," Aton Equity commented on June 1.

Aton also sees the risk of substantial decline of market supply and sees the news as sentimentally negative for listed Russian developers until more details emerge.

The latest data showed that the number of pre-sale share agreements on newly constructed housing projects in Russia in the first quarter of 2018 increased by 16% y/y to 0.147mn. For the same quarter of last year, the market saw a 17% y/y contraction. 

VTB sees two possible ways of tightening the regulatory framework in the segment. First could be stricter conditions for launching development projects (from 1 July 2018), while second could be limitations on collecting money during the construction stage (from 1 July 2019). 

"The latter materially changes the segment’s operational economics but has yet to finalise the conditions with respect to clients’ funds being available to companies during the construction," the bank warns.

Should the developers rely only on their own resources or on credits for construction, VTB estimates the cost base would be increased by some 20% and would then feed through into upward pressure on real estate prices. 

"The aforementioned changes favour large-scale developers that have established relationships with banks and so in our view could well trigger a widespread sector consolidation," the analysts conclude. 

Stocks of the building majors such as Etalon, PIK, and LSR Group (LSR) have been performing well on a sector that had already underwent a massive consolidation as small players were pushed out of the market in 2016.

The potential legal changes have already influenced the market, with developers rushing to approve projects in Moscow where the regulators issued 560 permits for the construction of housing projects totalling 3.8mn square meters (sqm) in the first quarter of 2018, marking a 1.5-fold year-on-year increase from 399 permits for 2.04mn sqm in 2017.

As well as tapping into a booming housing market fuelled by lower mortgage rates and government support, some analysts suggested that the spike in permit demands is due to uncertainty on housing construction legislation.